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CPA Cindy
CPA Cindy, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 57
Experience:  15 years in public accounting (Big 4)
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Worker injured in a factory accident due to his negligence

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1. In August, 2010 a worker was injured in the factory in an accident partially as the result of his own negligence. The worker has sued Wesley Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000.
2. A suit for breach of contract seeking damages of $2,400,000 was filed by an author against Greer Co. on October 4, 2010. Greer's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $600,000 and $1,800,000. No amount within this range is a better estimate of potential damages than any other amount.
3. Quinn is involved in a pending court case. Peete’s lawyers believe it is probable that Quinn will be awarded damages of $1,000,000.
Instructions:
Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers.

The following is included in the FASB Accounting Standards Codification Manual, Section 450-25-2:

1. As this amount is reasonably possible but not probable, it should be disclosed, but not accrued.

2. As this is probable (the threshold for requiring a charge to income), an accrual must be recognized in the current period. As the amount is estimatable and no award is a better estimate, the low end of the range ($600,000) would need to be accrued for the period. If material, specific disclosure should be made.

3. As this is a gain contingency, it should not be accrued as income or disclosed.

Hope this helps.

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